the fund’s first year.11 If a new age was coming, no one wanted to miss it. Long-Term was as fetching as a debutante on prom night, and all the banks wanted to dance.
The banks had no trouble rationalizing their easy credit terms. The banks did hold collateral, after all, and Long-Term generally settled up (in cash) at the end of each trading day, collecting on winners and paying on losers. And Long-Term was flush, so the risk of its failing seemed slight. Only if Long-Term lost money with unthinkable suddenness—only if, say, it was forced to dump the majority of its assets all at once and into an illiquid market—would the value of the bankers’ collateral be threatened and would the banks themselves be exposed to losses.
Also, many of the banks’ heads, such as Corzine and Merrill Lynch’s Tully, liked Meriwether personally, which tilted their organizations in Long-Term’s favor. But Long-Term’s real selling point was its connections to other powerful traders around the world. A firm that did business with Long-Term might gain valuable inside knowledge—totally legal in the bond world—about the flow of markets. “How do you get people to come to your party? You tell them that every cool person in town is coming,” said a banker in Zurich who financed Long-Term with a zero percent haircut. “So everyone said, ‘OK, I’ll do it, but if anyone else gets a haircut, I get one too.’” This was especially clever of Long-Term. The partners could say to each new bank, “If we give you a haircut, we have to give it to everyone.” So they ended up giving it to nobody. (On a small number of riskier trades they did agree to haircuts—but very skimpy ones.)
Since the banks, too, were doing arbitrage trading, Meriwether viewed them, not unjustly, as his main competitors.12 Long-Term resembled other hedge funds such as Soros’s Quantum Fund less than it did the proprietary desks of its banks, such as Goldman Sachs. The Street was slowly shifting from research and client services to the lucrative business of trading for its own account, fostering a wary rivalry between Long-Term and its lenders.
Having worked at a major Wall Street bank, J.M. felt that investment banks were rife with leaks and couldn’t be trusted not to swipe his trades for themselves. Indeed, most of them were plying similar strategies. Thus, as a precaution, Long-Term would place orders for each leg of a trade with a different broker. Morgan would see one leg, Merrill Lynch another, and Goldman yet another, but nobody would see them all. Even Long-Term’s lawyer was kept in the dark; he would hear the partners speak about “trading strategy three,” as though Long-Term were developing a nuclear arsenal.
Hilibrand, especially, refused to give the banks a peek at his strategies or to meet them halfway on terms. He would call a dealer, purchase $100 million in bonds, and be off the phone in seconds.13 “I’m just concerned about margin requirement, and I’m not putting up any margin,” he bluntly told Merrill Lynch. Kevin Dunleavy, a Merrill Lynch salesman, sometimes called Hilibrand two or three times a day, trying to pitch strategies he had devised with the clever Hilibrand in mind. But Dunleavy was repeatedly frustrated by Hilibrand’s obsessive secrecy, which made it nearly impossible to service the account. “Rarely could you take your ideas and implement them into LTCM’s strategy,” noted Dunleavy, an unaffected New Yorker with a military brush cut. “It was very unusual, not to take input from the Street. Larry would never talk about the strategy. He would just tell you what he wanted to do.”
The fund parceled out its business, choosing each bank for particular services and keeping a distance from all of them. Chary of becoming dependent on any one bank, Long-Term traded junk bonds with Goldman Sachs, government bonds and yen swaps with J. P. Morgan, mortgages with Lehman Brothers. Merrill Lynch was the fund’s biggest counterparty in derivatives, but it was far down the list in repo loans. To be sure, there was something shrewd about this divide-and-conquer strategy, for Long-Term did each set of trades with the bank that boasted the most specific expertise. But Long-Term thus forfeited the benefits of a closer, ongoing relationship. J. P. Morgan, for one, was extremely curious about Long-Term and eager to develop a closer working alliance, but it couldn’t get past the fund’s unwillingness to share confidences. “How can you propose ideas to them without knowing what their appetite is?” wondered the head of risk management at a major Wall Street firm. As arbitrageurs, the partners tended to see every encounter as a discrete exchange, with tallyable pluses and minuses. Every relationship was a “trade”—renegotiable or revocable if someone else had a better price. The partners’ only close ties were within Long-Term, mimicking the arrangement within their beloved group at Salomon.
They were a bred type—intellectual, introverted, detached, controlled. It didn’t work to try to play one off against the other; they were too much on the same wavelength. Andrew Siciliano, who ran the bond and currency departments at Swiss Bank Corporation, was stunned by their uncanny closeness. One time, Siciliano called Victor Haghani, the head of the London office, and followed up in Greenwich with J.M. and Eric Rosenfeld a month or two later. The American-based partners didn’t miss a beat; Siciliano had the eerie feeling that he was continuing the same conversation he’d had with Haghani.
Not that there weren’t tensions within the firm. A small group—J.M., Hilibrand, Rosenfeld, and Haghani—dominated the rest. As at Salomon, compensation was skewed toward the top, with the inner circle garnering more than half the rewards. This group also had voting control. Lesser partners such as Myron Scholes were forever angling for more money, as well as more authority. But the inner circle had been together for years; as in a family, their exclusive and inbred alliance had became second nature.
If the firm could have been distilled into a single person, it would have been Hilibrand. While veteran traders tend to be cynical and insecure, the result of years of wrong guesses and narrow escapes, Hilibrand was cool and maddeningly self-confident. An incredibly hard worker, he was the pure arbitrageur; he believed in the models, stuck to his prices, was untroubled by doubt. Rosenfeld hated to hedge by selling a falling asset, as theory prescribed; Hilibrand believed and simply followed the form. Hilibrand’s colleagues respected him immensely; inevitably, they turned to him when they needed a quick read. He was highly articulate, but his answers were like unrefined crystals, difficult for novices to comprehend. “You could refract the light with Larry’s mind,” said Deryck Maughan of Salomon Brothers. Like the other partners, but to a greater degree, Hilibrand saw every issue in black and white. He was trustworthy and quick to take offense at perceived wrongdoing but blind to concerns outside his narrow sphere. His Salomon colleagues used to joke that, according to the libertarian Hilibrand, if the street in front of your home had a pothole you ought to pave it yourself. But money probably meant less to him than to any of them. He found his passion in the intellectual challenge of trading. Aside from his family, he showed interest in little else. If anyone brought Hilibrand out of himself a bit, it was J.M. Hilibrand had a filial attachment to the chief, perhaps stemming from his close relationship to his own father. Rosenfeld had a similar devotion to Meriwether.
Outsiders couldn’t quite explain J.M.’s hold on the group. He was an unlikely star, too bashful for the limelight. He spoke in fragments and seemed uncomfortable making eye contact.14 He refused to talk about his personal life, even to close friends. After organizing Long-Term, J.M. and his wife moved out of Manhattan, to a $2.7 million, sixty-eight-acre estate in North Salem, in Westchester County—complete with a 15,000-square-foot heated indoor riding ring for Mimi.15 The estate was set back three quarters of a mile on a private drive that the Meriwethers shared with their only neighbor, the entertainer David Letterman. As if to make the property even more private, the Meriwethers did extensive remodeling, fortifying the house with stone. J.M. liked to control his private life, as if to shelter it, too, from unwanted volatility.
Though he attended a church near home and made several visits to Catholic shrines, J.M. didn’t speak about his faith, either. His self-control
